16 June 2007
Implementation of non-usury banking regulations in Iran over the past 23 years have always come in for criticism by academics on one side and seminaries on the other. Abbas Mousavian, a member of Islamic banking workgroup, is among those who believe that the law can be implemented differently. In the new model proposed by Mousavian and some other academics and banking experts, banks in Iran are divided into three groups: commercial banks, specialized banks and general banks. The Persian daily Donya-ye Eqtesad's Mohammad Taheri asked Mousavian to explain his new model. Excerpts:
MOHAMMAD TAHERI: Could you please explain more about the new model?
ABBAS MOUSAVIAN: The idea of new banking model came up some years ago when Parviz Aghili-Kermani, managing director of Karafarin Bank, in a letter to Tahmasb Mazaheri, then economic minister, explained that usury-free banking will increase expenses for both banks and clients seeking credits. He said in his letter that the model which was issued in 1982 was not to the benefit of the country in the long-run as the national economy will have to shoulder a lot of expenses. In his view, Iranian companies could not compete with foreign firms, for example those in Turkey. Mazaheri referred the letter to the heads of some state banks, including Valiollah Seif, then managing director of Bank Melli Iran requesting his comment.
Seif sought the views of economy professors at universities and seminaries. I was present in one of these meetings. At the beginning of the discussion, participants were speaking about various aspects of banking but later on everybody agreed on the lack of a well-defined model for non-usury banking system in Iran. This demanded broader research and studies of different models as a suitable replacement. Some experts were obliged to work on the banks' field of activities and prove that the nature of banks in Muslim countries is not like those in other countries. In fact their nature was totally different. Some banks were making short-term investments while others were investing in long-term projects. Even the basis of their activities was different. It urged fresh studies on contracts and Islamic agreements. Studies revealed that in Islamic Sharia (law) some contracts are regarded as short-term and some as long-term investment. Bank clients were also divided into those who had deposits and those who were seeking credits. Two groups were also seeking loans: they were either after gaining profit by using the loan in business or they had financial problems.
Results of researches made us offer a new banking model to divide responsibilities between different banks based on their fields of activity and clients. Islamic law was also considered in this division. We finally introduced three different fields for banks:
1. Commercial banks, for banks with short- or long-term investments at fixed lending rates.
2. Investment banks, for banks that invested on different fields. They could make long- or short-term investments under the supervision of experts.
3. Major banks or general banks are those which could both invest and work on specific fields as well as provide services for trade and investment activities.
Why do you consider your new model a step forward?
The current model was designed and implemented 24 years ago. Needs of the clients were not taken into account in depositing and lending. Even the capabilities of the banks were not considered in the model. Differences among the banks were also overlooked. For example it's not possible for some contracts to be signed in Melli Bank. Needs of the clients were ignored 23 years ago when the current banking model was designed.
How can it benefit the people?
The government seeks lower lending rates. The best way is to reduce the banks' expenses so lending rates can decrease. Unless this is done, banks will have to lower the rate for deposits. In the new model, we proposed solutions for lowering expenses of banks so they will no longer need to decrease the rates for their clients.
What are disadvantages of your model?
As the architect of this model, I believe that in practice it will face no problems. The benefit is that if a bank decides to experience it, it won't need major changes. It should only increase or decrease the share of dealing-contracts and joint-contracts. So after a two-year process, the bank can continue its activities in one of the fields mentioned. Specialized banks wanting to continue their activities in specific fields will increase share of joint-contracts so under a two- or three-year plan the focus of bank's activities will become joint-contracts.
Have you been criticized for your proposed model?
The main aim of this model is expanding non-usury banking in Iran and in Muslim countries. The new model is comprehensive and meets all the needs of Islamic banking but the current model of non-usury banking is not comprehensive. The essence of non-usury banking is that losses and profits of a project are shared by investor and economic agent. Some critics say that in commercial banks the basis is dealing-contract and this is against Islamic rules. We responded that the new model does not ignore joint-contracts in commercial banks. It will only specify proper usage.
Implementation of non-usury banking regulations in Iran over the past 23 years have always come in for criticism by academics on one side and seminaries on the other. Abbas Mousavian, a member of Islamic banking workgroup, is among those who believe that the law can be implemented differently. In the new model proposed by Mousavian and some other academics and banking experts, banks in Iran are divided into three groups: commercial banks, specialized banks and general banks. The Persian daily Donya-ye Eqtesad's Mohammad Taheri asked Mousavian to explain his new model. Excerpts:
MOHAMMAD TAHERI: Could you please explain more about the new model?
ABBAS MOUSAVIAN: The idea of new banking model came up some years ago when Parviz Aghili-Kermani, managing director of Karafarin Bank, in a letter to Tahmasb Mazaheri, then economic minister, explained that usury-free banking will increase expenses for both banks and clients seeking credits. He said in his letter that the model which was issued in 1982 was not to the benefit of the country in the long-run as the national economy will have to shoulder a lot of expenses. In his view, Iranian companies could not compete with foreign firms, for example those in Turkey. Mazaheri referred the letter to the heads of some state banks, including Valiollah Seif, then managing director of Bank Melli Iran requesting his comment.
Seif sought the views of economy professors at universities and seminaries. I was present in one of these meetings. At the beginning of the discussion, participants were speaking about various aspects of banking but later on everybody agreed on the lack of a well-defined model for non-usury banking system in Iran. This demanded broader research and studies of different models as a suitable replacement. Some experts were obliged to work on the banks' field of activities and prove that the nature of banks in Muslim countries is not like those in other countries. In fact their nature was totally different. Some banks were making short-term investments while others were investing in long-term projects. Even the basis of their activities was different. It urged fresh studies on contracts and Islamic agreements. Studies revealed that in Islamic Sharia (law) some contracts are regarded as short-term and some as long-term investment. Bank clients were also divided into those who had deposits and those who were seeking credits. Two groups were also seeking loans: they were either after gaining profit by using the loan in business or they had financial problems.
Results of researches made us offer a new banking model to divide responsibilities between different banks based on their fields of activity and clients. Islamic law was also considered in this division. We finally introduced three different fields for banks:
1. Commercial banks, for banks with short- or long-term investments at fixed lending rates.
2. Investment banks, for banks that invested on different fields. They could make long- or short-term investments under the supervision of experts.
3. Major banks or general banks are those which could both invest and work on specific fields as well as provide services for trade and investment activities.
Why do you consider your new model a step forward?
The current model was designed and implemented 24 years ago. Needs of the clients were not taken into account in depositing and lending. Even the capabilities of the banks were not considered in the model. Differences among the banks were also overlooked. For example it's not possible for some contracts to be signed in Melli Bank. Needs of the clients were ignored 23 years ago when the current banking model was designed.
How can it benefit the people?
The government seeks lower lending rates. The best way is to reduce the banks' expenses so lending rates can decrease. Unless this is done, banks will have to lower the rate for deposits. In the new model, we proposed solutions for lowering expenses of banks so they will no longer need to decrease the rates for their clients.
What are disadvantages of your model?
As the architect of this model, I believe that in practice it will face no problems. The benefit is that if a bank decides to experience it, it won't need major changes. It should only increase or decrease the share of dealing-contracts and joint-contracts. So after a two-year process, the bank can continue its activities in one of the fields mentioned. Specialized banks wanting to continue their activities in specific fields will increase share of joint-contracts so under a two- or three-year plan the focus of bank's activities will become joint-contracts.
Have you been criticized for your proposed model?
The main aim of this model is expanding non-usury banking in Iran and in Muslim countries. The new model is comprehensive and meets all the needs of Islamic banking but the current model of non-usury banking is not comprehensive. The essence of non-usury banking is that losses and profits of a project are shared by investor and economic agent. Some critics say that in commercial banks the basis is dealing-contract and this is against Islamic rules. We responded that the new model does not ignore joint-contracts in commercial banks. It will only specify proper usage.
© Iran Daily 2007
